UPS faces plenty of near-term headwinds as its trading environment is negatively impacted by trade conflicts.
The company is taking strategic actions to improve long-term profitability, making the stock more attractive for investors.
Analyst Fadi Chamoun at BMO Capital recently lowered his price target for UPS (NYSE: UPS) stock to $125 from $130 but maintained an outperform rating on the stock. Even though the analyst lowered the price target, it still represents a 29% premium to the current price, and an outperform is de facto a buy recommendation.
The analyst’s reasoning makes perfect sense. On the plus side, UPS’ first-quarter earnings were above expectations, and management’s ongoing reduction of lower- or no-margin Amazon.com delivery volume, while investing in growing higher-margin volume, is a long-term benefit as well. Furthermore, management expects to take $3.5 billion out of expenses due to its ongoing efficiency initiatives and the reduction in Amazon volume.
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Moreover, there’s no way to get around the fact that trade conflicts harm transportation companies. And the uncertain environment surrounding the tariff conflict led UPS management to forgo updating investors on its full-year target in the recent earnings presentation.
It’s a buy if you are prepared to be patient and have a tolerance for bad news. UPS may cut its guidance if the trading environment doesn’t improve and its dividend is not well covered by cash flow. The lack of a full-year guidance update is ominous and may lead to UPS missing its initial full-year guidance for the third year running.
On the other hand, its strategic initiatives (e.g., reducing Amazon volume, cutting costs, focusing on higher-margin deliveries) make sense and help set the company up for long-term growth. As such, the outperform rating makes sense — just be prepared for volatility if you buy in and don’t rely too heavily on the dividend.
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